The survival (or not) of Arab Gulf regimes is likely to hinge on their ability (or not) to provide jobs for vast numbers of young people who are due to enter the labour market over the next few years.

Historically, these regimes have sought to buy people's quiescence by creating well-paid but undemanding and often unnecessary jobs in the public sector – but they now recognise that this is not sustainable and are looking instead towards the private sector to create the jobs that will stave off revolution.

Pinning so many hopes on the private sector may be unwise, though, judging by a new research paper by Steffen Hertog of the London School of Economics. Hertog looks in some detail at the state of the private sector in the GCC countries and makes a number of points that ought to worry their regimes.

Perhaps most importantly, the private sector strongly prefers foreign labour to local labour, since it is cheaper and tends to be more productive. Hertog writes:

"The focus of private GCC businesses on short-term rent extraction from low-skill, low-cost foreign labour and an aversion to investing in long-term productivity upgrades and skills of local staff have contributed to the exclusion of large sections of GCC nationals from private labour markets. 

"Levels of national labour participation generally are low, and the majority of GCC citizens in paid work are employed in the public sector, where politically determined over-employment is rampant ... 

"To the extent that nationals are employed, this is as often the outcome of administrative interventions of forced 'Saudisation', 'Kuwaitisation', 'Omanisation' etc as it is of genuine job creation. Business for the most part has been fighting this nationalisation agenda tooth and nail, as it increases costs and saddles them with more demanding employees that are much harder to dismiss."

These employment patterns, Hertog adds, also hinder moves into more technology-intensive production based on higher skills. "It is too easy to generate returns by relying on unskilled and semi-skilled labour from the developing world as low-tech, but cheap and easily controlled input."

Meanwhile, the private sector benefits from government subsidies which give it less incentive to focus on increasing productivity:

"GCC governments have ... made capital, energy and infrastructure available at low or sometimes no cost, which has been especially important for the local manufacturing sector, and which has been used in lieu of the protective tariffs used to nurture industry in poorer jurisdictions." 

In the long run, Hertog says, most GCC businesses could not operate without the state's help but, despite these subsidies, GCC governments get very little financial benefit in return:

"The state’s role remains larger in GCC economies than in most other regions of the world, and, unlike the case in tax-based economies, Gulf businesses contribute practically nothing to sustaining the state demand they depend on, as they generate little or no tax income."

A further problem with this is that state support for business has done little to promote the "knowledge economy" that GCC governments aspire to:

"State support in the GCC has by and large not been conditional on technology upgrades, and the GCC has witnessed none of the resource scarcity that has forced advanced Asian manufacturers to invest into technology. 

"The share of high technology exports in total GCC manufacturing exports is orders of magnitudes lower than in other world regions. This would be the case even if the analysis were limited to non-oil exports."

One important result of this is what Hertog describes as a "generally antagonistic" relationship between business and citizens, since both groups are competing for the state's resources:

"Much of business growth in the GCC remains financed through state spending and state provision of low-price inputs, which hence become unavailable for other forms of broader distribution. This situation creates an unusually harsh zero-sum game between business owners and citizens who are not business people (or senior management) ...

"The overall situation is such that a rational national voter is likely to demand populist economic policies from the government, even if these destroy business, as the cost of such 
policies are only borne by the business class itself. 

"This is exactly what has been happening in Kuwait, which is by far the most democratic GCC country, but also the one with by far the worst record of economic modernisation." 

The majority of GCC citizens continue to have no significant stake in private sector growth, Hertog says, and "in the long run, distributional conflict is set to grow, as demands on state resources will become ever larger due to both a growing business sector and a growing national population". 

    
Posted by Brian Whitaker
Tuesday 6 August 2013